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Making Forex Market Forces Work for You

There are numerous factors and studies that a forex futures trader must consider before entering into any contracts. Because of this, a lot of traders ignore such fundamental market elements like open interest and volume.

This is unfortunate, because analyzed in conjunction, open interest and volume can help a futures trader scrutinize and determine likely forex trends. By harnessing these market forces to work for you, you will be able to avert heavy losses and make profits.

For the unfamiliar, volume refers to the total amount of transactions that take place in a futures contract for a given time period. The number of options on a futures contract are also considered volume. The total quantity is determined on a per trading session basis.

Open interest should not be confused with interest rates; open interest take into account the total number of futures contracts that have yet to be consummated, and also refers to options in futures contracts that hitherto not been offset. The arithmetic behind open interest in the forex futures market is as follows:

An agreement between two new parties to buy and sell increases open interest by a point. If a trader (long position) sells to a forex trader who wants to go long, the open interest will remain unchanged. Selling a contract to a trader who will relinquish his position (short) will cause open interest to go down a point.

The ideal futures strategy concerning these two elements is to use them together. You should avoid trading if the volume and open interest figures are low, as these not only makes transactions difficult, but the situation makes it prone to manipulation. Conversely, heavy volume and high interest is the time to enter.

It should be noted in your futures strategy that when volume and open interest are strong, the trend -positive or negative) will likely continue for a while. If the opposite scenario is taking place, then the market direction will change.

When devising a futures strategy, be aware that a surge in price of an asset or item despite light volume could be indicative of a level (top or bottom) that will be reached. If the price diverges from the trend in the forex, then it is a signal that the trend itself will change course.

Part of your futures strategy should also include the fact that open interest have what traders call seasonal averages. That is, there are times in the year when they are naturally higher or lower. If the open interest is higher than it usually is, it is indicative that new money is coming into the market, and that it is a good time to buy.

But if the open interest falls sharply, coupled with an increase in prices, then the market is entering a bearish mood. Also consider that a sharp increase in open interest is usually followed by a rapid downturn or correction.

Open interest and volume are just two of the forces in the futures market that a trader can utilize in creating a futures strategy. By incorporating these indicators along with your other analytical market studies, you will be able to profit consistently.

There are numerous tools available for the futures trader to help him profit from the market. However, one should also include an analysis of the market forces themselves, for properly utilized, can benefit a forex trader well.

The central banks plays a major role in the market of currencies particularly with the interest rates.A trader's familiarity with the activities of the central banks can help him predict the market's direction.

The Elliott Wave principle or the Elliott Wave theory is a concept that divides any major market movement into five waves or phases. It has long been held that this idea can apply to the forex market as well, and should be of interest to forex investors.